When Steven Spielberg first considered moving on to the last piece of unspoiled open land in Los Angeles, to build a studio for his film company DreamWorks, he was invited by the developer to go up on a scissor- lift to admire the view from his as yet unbuilt office window.

Before him lay a four-mile stretch of coastal wetland wedged between LAX international airport and the Marina Del Rey: a rugged, marshy patchwork of reeds, wild grass and low foliage. This was a rare piece of untrammelled nature clinging on in this most unnatural of cities, a sanctuary for dozens of rare animals and birds, and a sacred American Indian burial site to boot.

What Spielberg was invited to envisage was a radical rethink of the whole area in glass and concrete - not just a complex of sound stages and offices for DreamWorks, but a mini-city made up of 13,000 housing units; five or six million square feet of office space; 600,000 square feet of shopping malls, and new roads stretching all the way out to the Pacific Ocean.

"Wow," Spielberg is reported to have said. "This is really neat."

Three years on, after a marathon round of negotiations with the developers and endless run-ins with environmentalists, the dream looks like it is about to become reality. DreamWorks made its first written commitment to deal at the end of last month, and construction is set to begin as early as January. The new studio will occupy a 48-acre space at the back of the lot, alongside a projected cultural centre that will include post-production facilities for film-makers and three stages for live theatre.

All of which sounds exciting on its own terms, except that it has left environmentalists appalled by DreamWorks' collaboration with the worlds of big-money politics and property speculation, and the seemingly off- hand way in which a group of liberal, nominally pro-environmental film- makers are consigning the Ballona Wetlands to destruction.

This would be the largest real estate development in Los Angeles' history - assuming that other high-profile companies follow DreamWorks into the deal - and arguably one of the most destructive. And it is not only Hollywood that has been co-opted to the familiar cause of drowning yet another 1,000 acres of California in concrete. Nearly everyone involved has paid lip- service to environmentalist concerns, only to brush them aside when the real money has begun to talk.

The city council member representing the area, Ruth Galanter, was elected because of her staunch opposition to the project, but since arriving in office seems to have done nothing but champion it and public money has even been used to set up a special planning office.

The environmental group that first sued the owners of the land to stop them building, the Friends of the Ballona Wetlands, reached a legal settlement with the developers four years ago, since when it has been putting forward the curious argument that the prospective new city is in fact going to be a boon for the environment, and the only thing that will save the wetlands from irretrievable erosion.

That has left only a handful of dedicated environmentalists unconnected with the Friends, public interest lawyers, local residents and independent commentators to carry on the fight. They have had some successes. In June, a federal judge revoked a permit giving the developers a green light to bulldoze a part of the wetlands with impunity. And the city council has been pressured into issuing injunctions against some of the more blatant infringements of the judge's ruling.

But that on its own has not been enough. The mainstream liberal press and Democrat political establishment have been strangely reticent on the whole issue, despite the stated commitment of figures like the California Senator, Barbara Boxer, to protect the environment, and the state's wetlands in particular.

Even the greener-than-green Vice President Al Gore considered lending his support to the Playa Vista project, abandoning the idea only because a highly respected conservation group, the Sierra Club, voiced staunch opposition.

Everything about the project reeks of Orwellian doublespeak. The property development has been given the charmingly innocuous name Playa Vista, Spanish for "beach view". The talk has not been of 10- or 12-storey blocks of condominiums or additional car pollution, but rather of a new "campus" and a cultural regeneration for Los Angeles' West Side. The sump envisaged to collect drain water from the project is being called a "freshwater marsh" and portrayed as some kind of contribution to the environmental revival of the area.

How did all this craziness come to pass? "The genius of the strategy," offers Jill Stewart, a trenchant columnist on the weekly magazine New Times Los Angeles, "has always been that developer Robert Maguire co-opted Hollywood from the start - and thus co-opted the city officials, environmentalists, major Democrats and Westside liberals whom Hollywood not so subtly controls".

One might add that the development is absolutely par for the course in Los Angeles, a city whose largest industry has always been real estate and the search for a quick buck from land exploitation. Indeed, the pertinent question about the Ballona Wetlands is not perhaps why it is under threat now, but rather how it ever managed to survive so long. The answer has to do with the eccentricities of Howard Hughes, the reclusive millionaire, who built a private airstrip at the eastern end of the site but left the rest untouched.

When Hughes died in 1976, his heirs immediately set about creating their vision of Playa Vista. A 16-year legal battle with local residents and environmentalists ensued, at the end of which the Friends of the Ballona Wetlands backed down in exchange for two commitments - a promise by the developers not to build a highway through the middle of the site, and the establishment of a $12.5m project to save at least part of the saltwater marshes.

That settlement displeased almost every other environmental group in the city, since it effectively gave the property men a green light, but by that stage the finances of the operation had complicated considerably. By the time of the settlement with the Friends, the developers were falling behind on their mortgage payments and desperately needed new capital. That was where DreamWorks came in - not only making a verbal commitment to become the site's anchor tenant, but bringing in development capital galore on its coat-tails. "If it hadn't been for DreamWorks, there would be no project," said Marcia Hanscom, whose Wetlands Action Network has been at the forefront of the recent campaigning. "There is no way that Goldman Sachs and Morgan Stanley would have come in without Spielberg and the others."

With the project revived, the city of Los Angeles quickly fell into line and the US Army Corps of Engineers issued a permit for part of the wetlands to be bulldozed, even though it was a federally protected area. The Army Corps permit was the subject of the federal court case heard in June, and although Judge Ronald Lew was a Bush appointee and no friend of environmentalists, he concluded that the permit was "arbitrary, capricious and otherwise not in accordance with the law".

In theory, developers now have to wait for the results of an Environmental Impact Study before continuing with the project. But that is not what is happening. Standing on the Westchester bluffs just to the south of the site, the idle observer can see dozens of bulldozers flattening vast swathes of the site, including parts of the fenced-off, federally delineated Wetlands.

For local residents, the damage is impossible to ignore. The cranes, blue herons and white egrets that were a common sight have become a rarity. In recent months, activists have focused their anger on DreamWorks as the most visible player, turning up at film premieres, shouting slogans and distributing leaflets. The pressure has clearly had some effect: as late as August it looked as though the deal might be called off because of concerns by Spielberg's partner, Jeffrey Katzenberg, about the financial arrangements and environmental guarantees.

But the attraction of these wetlands to DreamWorks appears irresistible. Faced with the gargantuan cost of building the first new Hollywood studio in more than 50 years, DreamWorks can enjoy large-scale financial participation by others, and also the promise of tax breaks running into tens of millions of dollars. The price-tag now being bandied about for the studio is $200m - the price of a couple of summer blockbusters. That said, DreamWorks is still hedging its bets. It has just completed a new animation studio 30 miles inland, and is said to be looking at a North Hollywood site as a possible substitute for Playa Vista. But even if it were to pull out at the eleventh hour, it is doubtful whether the Wetlands could still be saved.

In his ruling, Judge Lew acknowledged that even if the small areas of federally delineated wetlands are left alone - and they haven't been - they don't stand much chance as a habitat for rare animals and birds if everything around them is concreted. DreamWorks or no DreamWorks, Los Angeles seems destined to lose its last stretch of unspoiled greenery.